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The perils of indispensability

9 July 2012 By Hugo Dixon

Was Bob Diamond really irreplaceable? Barclays’ board operated for 15 years on the assumption that he was. As a result, the UK bank’s chief executive became more powerful – and ever harder to replace. Now that he has been kicked out in the wake of the Libor rate-rigging scandal, Barclays is struggling to find new leadership.

This is an object lesson for all companies, not just banks. Think of two other UK-listed groups which have recently provoked shareholder anger over their bosses’ high pay packages: WPP, the advertising giant; and miner Xstrata. In both cases, the boards paid their chief executives so much because they thought they were indispensable.

Barclays is now in a mess. Not only has Diamond quit, his chairman, Marcus Agius, has also said he will resign. Both men ultimately had to go: Diamond had come to epitomise the worst of the City of London’s greed, while Agius seemed unable to hold his chief executive in check. Neither man responded to requests for comment.

The manner of their going means the bank is now rudderless at a time when a political storm is swirling around it and a financial crisis is bubbling across the English Channel.

It will be hard to find a good candidate to replace Diamond, given that Barclays has now become a political football and the next boss will have to put up with intense media scrutiny. Attracting a good chairman won’t be easy either, although the deputy chairman, Michael Rake, seems prepared to step into the breach.

Diamond was undoubtedly an entrepreneurial banker. When he took over Barclays Capital in late 1997, the lender’s investment banking unit had 135 billion pounds in assets and made 252 million pounds in pre-tax profit. By last year, assets were 1.2 trillion pounds and profit was 3 billion pounds.

This dramatic growth was largely a function of two factors: the multi-year credit boom that lasted until 2007; and Diamond’s ability to persuade the Barclays board to pour resources into investment banking. This expansion continued after the crunch, when the bank acquired the largest chunk of Lehman Brothers out of bankruptcy.

Barclays’ share price performance, however, has been miserable, more than halving over the near-15 year period. During that time, Diamond and his key lieutenants received hundreds of millions of pounds in compensation. Diamond himself has earned at least 120 million pounds since he joined the board in 2005, according to Manifest, the corporate governance group.

Diamond ran BarCap as a fiefdom, with seemingly little oversight from a series of chairmen and chief executives at the parent bank. Despite the successes, there were problems: sometimes excessive risks were run; the organisation developed fiendishly complicated tax-minimisation schemes for its clients that went right to the border of what was legal; and, of course, it has now emerged that some Barclays traders attempted to manipulate Libor.

Diamond’s first slip came in 1998 when BarCap expanded its exposure to Russia just before the Kremlin defaulted and devalued. But Barclays kept him on, fearing that the investment bank would be too fragile if he quit. The idea of Diamond the indispensable was born.

Over the next six years, BarCap expanded so rapidly that Diamond was considered a candidate to be the next Barclays chief executive. In the end, the board chose John Varley. But directors were worried that Diamond would leave and, soon afterwards, gave him the title of president of Barclays in addition to that of BarCap chief executive. That seems to have undermined Varley’s authority.

When Varley retired at the end of 2010, BarCap was contributing 79 percent of the whole bank’s profit and Diamond was the obvious successor. He then became an even more dominant force in the bank.

In theory, a strong chairman could have acted as a counterweight. But, in Agius, Barclays doesn’t seem to have had such a chairman. This became apparent when Diamond was awarded 80 percent of his bonus for last year despite himself describing the results as unacceptable. Almost 27 percent of shareholders voted against the Barclays remuneration report.

The fiasco over this year’s pay finally persuaded Barclays’ non-executive directors that they needed a new chairman. They told Agius that they wanted him to step down at next year’s shareholder meeting. But before they could implement the plan, the Libor scandal blew up.

The board initially decided to hang onto Diamond – in part because there was nobody obvious to replace him. His two top lieutenants – Rich Ricci, BarCap’s chief executive, and Jerry Del Missier, Barclays’ chief operating officer – were both part of the same brash culture and out of tune with the current zeitgeist.

Agius himself decided to fall on his sword, seemingly thinking this would take the heat off Diamond even though the rate-rigging was an operational matter and so nothing to do with the chairman. But the Bank of England made clear this was not the right response and that Diamond would have to go.

Agius is, therefore, hanging on and running the executive committee on a stopgap basis even though he doesn’t appear to have the necessary skills. Meanwhile, the bank is looking for both a new chairman and chief executive.

And the moral of the story? Boards must always counterbalance strong chief executives with strong chairmen and have good succession plans in place. Most importantly, they should never treat anybody as indispensable – in case that is what they become.

 

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